• Ordinary people have long been fascinated by the lifestyle of the rich and famous, which is routinely reported in the western press.  The American magazine Forbes publishes annually a list of the world’s “billionaires,” meaning persons whose private wealth exceeds one billion US dollars or equivalent.  The list is drawn largely from publicly available information, so probably excludes some members of royal families and other very private persons, although it is difficult to conceal $1 billion in wealth.  The Forbes list contains 1645 names in 2014 (up from 537 in 2001), of whom 959 were from rich countries and 686 were from relatively poor countries, now called emerging markets. The number in China was 152, up from one in 2001 and none in 1970 – although Mao Zedong with his private train and numerous guest houses arguably had the perquisites of a billionaire, without personally owning the assets.

    Less well covered than lifestyle is the source of the wealth, much less an analysis of the possible economic consequences of the accumulation of such concentrations of wealth.  This deficiency has now been rectified by Caroline Freund of the Peterson Institute of International Economics in Washington.  She distinguishes between billionaires in advanced countries and in emerging markets, and for each group asks how many billionaires received their wealth, and how much, through inheritance, and how many were “self-made” billionaires. Among the self-made billionaires, how many made their wealth (and how much) in the financial sector (including property investments), in the resource sector, through privatization of state-owned assets, and through founding or managing new non-financial firms.  She focuses especially on the last group, on the grounds that wealth accumulated through the other channels were more likely to involve important government connections, either through regulators or through allocations of government property (including land).  While there were doubtless some entrepreneurs, excellent managers, and even innovators among these “self-made” billionaires, there is at least some suspicion that they acquired their wealth primarily through their connections to decision-making government officials. Founders of non-financial, non-resource firms are less suspect in this regard.

    Sub-Saharan Africa had 16 billionaires in 2014 (up from two in 2001) on the Forbes list, half of them in South Africa (and all of the inherited wealth). Of the 16, 13 were self-made, of which in turn 7 were founders or executives of non-financial, non-resource firms.

    Freund compares 2014 billionaires with those in 2001.  What are her main findings?

    • First, the relative importance of inherited wealth declined over this 13-year period, modestly in advanced countries, significantly in emerging markets, from 41 percent of billionaires to 34 percent in the advanced countries, from 43 to 17 percent in emerging markets. Self-made wealth accounts for the majority of billionaire wealth in both groups of countries, and the share has risen, along with the total number of billionaires. Inherited wealth is on average slightly greater than self-made wealth, but not by much.
    • Second, among self-made billionaires, founders of (non-finance) companies accounted for the largest category in the rich countries, and rose modestly from 31 percent in 2001 to 34 percent in 2014, whereas in emerging markets this category declined slightly (in share, not in absolute numbers) to 22 percent and lagged in importance behind politically-connected billionaires at 29 percent. Billionaire wealth originating in the financial sector accounted for around 20 percent of 2014 billionaires in the advanced countries, 23 percent (mostly from real estate) in emerging markets.
    • Third, the self-made billionaires are closely associated with new firms that grow rapidly both in output and in employment in the host country, thus contributing to economic growth. Firm growth to large size typically produces great wealth for their founding owners. By the same token, these new firms contribute to overall economic growth through new production and, typically, higher productivity.
    • Fourth, the contribution of new firms to economic growth is typically higher where the new firms are engaged with the world economy, whether through exports, imports, or investment, where they have to meet world standards in both quality and price.  In China, some new firms have thrived without such engagement, but there extensive rivalry among provinces and cities creates a competitive environment in the domestic economy.
    • Fifth, the emergence of new billionaires has been associated with a sharp increase in inequality of income and wealth.  Where this wealth is self-made, as it is in many emerging markets, it both accompanies and facilitates rapid economic growth.  Starting from a low level of income, greater inequality is usually associated with rapid growth, as some individuals are better able to take advantage of new opportunities in a rapidly changing environment – or in some cases are simply lucky enough to be at the right place at the right time, but to recognize and exploit the new opportunities.
    • Sixth, the average age of self-made billionaires is markedly lower in emerging markets than in advanced countries: in emerging markets nearly half were under the age of 50, whereas in advanced countries only 12 percent were under 50.  There is also high turnover among self-made billionaires, especially in emerging economies.  Either they become richer or they tend to drop out of the group. In emerging markets, only 60 percent of the billionaires of 2001 will still on the list in 2014.
    • Seventh, there are few self-made female billionaires (many more have inherited wealth), only 38 worldwide in 2014, and most of those are in the United States (16) and China (8), plus 2 if Hong Kong is added. Why there are so few, and why those few are so heavily concentrated, provides lots of scope for reflection and speculation.

    Rapid growth in the number and the wealth of the very wealthy in emerging markets suggests the strong need, soon, to reflect on how these societies want to shape the distribution of future wealth.  In particular, do they want to end up like Latin America or Western Europe, where over half the wealth is perpetuated through inheritance, or do they want to encourage self-made wealth?  Now is the time to think about instituting estate taxes, and perhaps using them (through exemptions) to encourage socially valuable philanthropy.

     


    Image Credit: Africa Ranking